What is the fastest growing category of student loan borrowers? Your first guess might be Millennials, since they are the largest segment in the market. Or Generation X, maybe, since these folks might be going back to school after having established themselves. Surprisingly, aging Baby Boomers, those over 60, have quadrupled in number to nearly 3 million from 2005 to 2015.
Perhaps less surprisingly, most of these older borrowers are carrying debt for their children and grandchildren. Though this generosity is admirable, it may not be very sound. Many financial advisors agree that taking on student loan debt is detrimental to a parent’s or grandparent’s financial security. Especially as they approach retirement.
Baby Boomers, by and large, are already highly unprepared for retirement. Some estimates suggest they have less than half the estimated $658,000 in defined contribution plans they need to retire.
Taking on student loan debt, either directly or as a cosigner, can only extract more resources from an underfunded retirement, jeopardizing housing and even living expenses for those on fixed budgets.
And though direct debt is more straightforward, cosigning can be even more troubling to retirement. Since most cosigners do not expect to have to pay the student loan debt of their child or grandchild, they often have not planned for the demands of student loan servicers when a loved one is unable to keep up with their payments.
One of the most challenging issues around cosigning is that, by its nature, cosignees are unsafe bets. That’s why credit institutions require a cosigner. Even the most well-intentioned young people with dubious, unsteady credit scores are much more likely to run into financial trouble. Cosigners don’t want to view their child or grandchild as “bad risks.” But, when cosigners are either close to or in retirement, they may have a very limited ability to increase their income. This makes it a particularly dangerous time to take financial risks.
Perhaps that is why the default rate for borrowers 65 and older was 37 percent in 2015. This was more than double the default rate for those 49 and under. Unfortunately for these seniors citizens, though often unaware of this when they cosign, student loan debt can be deducted from social security benefits. More than 40,000 borrowers lost some Social Security benefits in 2015, an increase of 360 percent.
This does not even take into account such tragic outcomes as the death of the cosignee or cosigner. Depending on loan type and structure, these may require payoffs that add additional unexpected financial stress to surviving, already grieving family members.
Though generous and well-intentioned, cosigning may start an avalanche of financial backsliding that works its way into younger generations. It might be best, according to many advisors, to urge a child or grandchild to find a way to make it through college without a signature on a loan that might cause a tremendous amount of financial stress at a time it can be least afforded.
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